The sharp fall in energy prices deepened deflation

Postitatud:

06.02.2015

Energy prices fell even further in January, with the result that the total price level in Estonia was 0.4% down on the previous month. Data from Statistics Estonia show that prices fell by 1.3% over the year, which is the largest fall in the past five years.

Global oil prices were around 25% lower in January than in December and some 55% lower than in the previous January. Prices for motor fuels fell by 20.7% over the year in Estonia as a result, bringing inflation down by 1.1 percentage points. While manufactured goods fell in price by 0.4%, inflation in prices for services rose to 1.4%. This rise was partly a consequence of prices for communications falling steadily more slowly since the start of 2014.

Prices have been falling for eight months, which benefits consumers, and this can be seen in growth of more than 6% in retail sales across the whole of the year. The rise in real wages has meant that household assessments of their financial situation have improved consistently and households are now less reticent about using loans to finance purchases than before. Falling prices have started to have an effect on inflation expectations among consumers, which turned negative in January for the first time since 2010. If these expectations remain low for a long time, consumers may start to delay purchases of durable goods, and this will in turn put a brake on growth in retail sales.

Initial estimates indicate that prices fell further in the euro area as a whole, with prices in January down 0.6% on the year, having been down 0.2% a month earlier. Prices also fell in the euro area mainly because of cheaper energy prices, but there was also slower growth in prices for services and manufactured goods. In order to slow the fall in prices and help it reach its inflation target, the European Central Bank recently announced a new asset purchase programme. Increasing economic activity in the euro area will also help inflation to accelerate: growth in retail sales and in job creation has been increasing recently, and corporate expectations for growth became more optimistic in January. The oil price rose appreciably in the first few days of February, and prices for future transactions indicate that it will rise further. A rise in the oil price would slow the fall in prices in the coming months in both the euro area and Estonia.

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Ingrid Mitt
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